The Internal Revenue Service has issued final regulations governing the disclosure of the financial effect and relative value of optional payment forms offered under defined benefit and money-purchase pension plans. Such plans must describe these optional forms (and their relative values) in the qualified joint and survivor annuity (“QJSA”) explanation they are required to provide to participants just before their benefit commencement date.
The new regulations bring closure to a long period of rule-making, revision, and delayed effective dates. The IRS first issued “final” rules in December 2003. We discussed these rules in our July 2004 issue of Benefits in Brief, when the IRS delayed their effective dates in recognition of the fact that their complexity had made it difficult for plan sponsors to comply by the original dates. (See “IRS Extends Deadline for QJSA Explanations.”) The IRS then updated the 2003 final rules with a set of proposed regulations in January 2005. Now that the rules have finally stabilized, plan sponsors will need to review – and in many cases revamp – their QJSA explanations to comply with another new (but no less complex) set of requirements. WHAT STAYS THE SAME
The 2006 final regulations preserve substantially all of the changes the IRS introduced in the January 2005 proposed regulations. Significant retained rules include the following:
- Plans may use reasonable estimates in disclosing the normal form of benefit, provided that special requirements are met, including a requirement that such plans offer to provide specific information upon the participant’s request;
- Plans may supplement generally applicable information with selected items of participant specific information; and
- Plans may offer a lump-sum payment (or other form of benefit that is subject to the minimum present value requirements of Code Section 417(e)(3) that is more valuable than a QJSA for married participants, if that benefit is calculated using the actuarial assumptions provided in Section 417(e)(3).
The 2006 final regulations include numerous modifications to the 2003 rules that were not included in the 2005 proposed regulations. Those modifications include the following new rules:
- Plans may now employ simplified explanations of the financial effect and relative value of substantially identical payment options (for example, survivor annuity percentages that vary in one-percent increments);
- Similarly, plans may employ simplified explanations when they offer separate elections with respect to different components of the same benefit;
- QJSA explanations must now explain benefit payment forms that are available with retroactive annuity starting dates (though this comparison may be demonstrated using the same date the QJSA explanation uses for other optional forms);
- Plans may state that optional payment forms with an actuarial present value of at least 95% but not greater than 105% of the QJSA’s value may be described as “approximately equal” in value to the QJSA (this change will have significantly different effects on QJSA notices to married versus unmarried participants); and
- The reasonableness of the actuarial assumptions a plan uses to determine the value of optional payment forms will now be determined without regard to the individual participant’s circumstances, and the applicable mortality table and the applicable interest rate provided in IRS regulations issued under Code Section 417(e) will be considered de facto reasonable.
The final regulations also remove a controversial provision of the 2005 proposed regulations. That provision set forth a list of payment forms the IRS considered to be subject to the present-value requirements of Code Section 417(e)(3).
Contrary to the opinion (and practices) of many plan sponsors, that list included Social Security level income annuities and partial lump sum/annuity options.
Excision of this list from the final relative value regulations does not mean, however, that the IRS no longer considers these payment forms to be subject to the present-value requirements of Code Section 417(e)(3). It means only that the IRS agrees with commentators who argued that the relative value regulations did not provide the proper forum for the Service to advance that view. WHAT THE NEW RULES MEAN FOR PLAN SPONSORS
Like the 2003 final regulations before them, the 2006 final regulations are extremely complex – not least with respect to their effective dates. Plan sponsors must now push the numerous changes mandated by these rules through their QJSA explanations. On the bright side, the final regulations do provide for a relaxed compliance period that generally extends to QJSA explanations provided to participants before January 1, 2007, and during which a good-faith effort to comply with the final regulations will be deemed to satisfy them. Plan sponsors should take advantage of this brief respite to comprehensively review their QJSA explanation forms and procedures for compliance with the new regime.